German business doesn't want it, the European Union is highly suspicious of it and the City of London hopes for a lucrative windfall. But Germany's government has pressed ahead with it anyway.

The object under question is a draft law, which German Chancellor Angela Merkel's (pictured) Cabinet passed in late August, that would allow the Economy Ministry to veto foreign investments in German companies that threaten public order and security. The law, which needs parliamentary approval, would establish a committee, loosely modeled on Washington's Committee on Foreign Investment in the United States. Its task would be to scrutinize purchases of stakes of 25% or more in German firms by buyers from outside the EU and its four partners in the European Free Trade Association, Norway, Switzerland, Iceland and Liechtenstein.

Sovereign wealth funds and foreign government-linked investors are the presumed threats, of course, and certain governments are clearly more worrying than others. The law would not be aimed at Norway, certainly, even if it boasts one of the oldest and best established sovereign wealth funds. It's been 900 years since the Viking invasions, and Germans haven't thought about marauding Norwegians since.

But Merkel has already opposed a Russian investment in German telecommunications group Deutsche Telekom AG and stopped a state-controlled Russian bank from increasing its stake in European Aeronautic Defence and Space Co. NV, or Eads, the parent of aircraft manufacturer Airbus. The Russians -- who at the time had not yet shown their hand in Georgia -- backed off. Yet Dubai's sovereign wealth fund has managed to acquire a small stake in Eads, and Kuwait Investment Authority owns 7.6% of carmaker Daimler AG.

Politically, the foreign investment law might have been an astute move for the German government. Business federations have spoken out against it, warning, correctly, that restricting foreign investment in Germany could lead to similar restrictions on German investments overseas. The industry federation, BDI, even sought an opinion from law firm Freshfields Bruckhaus Deringer LLP, which argued the draft breached EU rules. In the media, Munich's Süddeutsche Zeitung said such government interference in business decisions was worthy of a banana republic, and the Berliner Zeitung argued the law might protect business from some theoretical foreign interference but did nothing to protect it from domestic political interference.

Yet German voters, who, like Americans, are fearful of possible threats to their jobs and security from outsiders, will readily support a bit of populist foreigner bashing.

However, Germany's economy minister, Michael Glos, spoiled the political effect almost as soon as the ink was dry on the Cabinet's decision. To the fury of the state government of Hamburg, he said he would not use the law to block the takeover of German shipping group Hapag-Lloyd AG by the Singapore government's Temasek Holdings Pte. Ltd.

That this was the right thing to do is not really the point. It only emphasized that nobody, least of all the government, knows exactly what the law is really for. It is more of a general insurance policy put in place before the exact threat has been identified. As Glos has pointed out, you can't take out fire insurance once a building is burning.

Glos claims the law would be used sparingly and reflects consultation with officials at the European Commission in Brussels. But that has not stopped the Commission from asking to see the draft to ensure it really does comply with EU principles, of which free movement of capital is key. So too is compliance with the EU's international obligations.

Freshfields' views notwithstanding, the Germans might be within their rights. Brussels is itself working with the International Monetary Fund and other international organizations on a common code of conduct for sovereign wealth funds and recipient countries, and it does recognize that individual states may have national rules as long as they are nondiscriminatory and are for national security, not economic protection.

But for as long as there is no coordinated international or EU code, individual countries that act on their own risk others undermining them. It is one thing blocking, say, a sovereign wealth fund taking a direct stake in German stock exchange operator Deutsche Börse AG. But it might be illegal under EU rules to prevent the same fund from investing through a legitimate U.K. or Irish vehicle. That's why the City of London -- which has already allowed Qatari and Dubai investments in its own stock exchange operator -- is watching with interest.